News July 2016 Corporate culture key to sustainable growth

Corporate culture key to sustainable growth

20 July 2016

PN 41/16


Today the Financial Reporting Council (FRC) publishes the results of a study (PDF), exploring the relationship between corporate culture and long-term business success in the UK. Stakeholders and society in general have a vested interest in healthy corporate values, attitudes and behaviours that lead to sustainable growth and long term economic success.
 
The report is the culmination of the FRC’s Culture Coalition*, a collaboration with CIMA,  the City Values Forum, IBE, IIA and CIPD , as well as interviews with more than 250 chairmen, CEOs and leading industry experts, from the UK’s largest companies. The report explores the importance of culture to long-term value and how corporate cultures are being defined, embedded and monitored.
 
Sir Winfried Bischoff, Chairman of the FRC, said:

“A healthy corporate culture leads to long-term success by both protecting and generating value in the UK economy. It is therefore important to have a consistent and constant focus on culture, rather than wait for a crisis. A strong culture will endure in times of stress and change.

Through our research, it has become clear that establishing the company’s overall purpose is crucial in supporting and embedding the correct values, attitudes and behaviours.

The extremely positive response from many individuals and organisations, demonstrates how important the subject is. I would like to thank all those who joined the debate to foster sustainable growth and long-term business success in the UK.

 
Key findings of the FRC’s study

 

  • Recognise the value of culture: A healthy corporate culture is a valuable asset, a source of competitive advantage and vital to the creation and protection of long-term value. It is the board’s role to determine the purpose of the company and ensure that the company’s values, strategy and business model are aligned to it. Directors should not wait for a crisis before they focus on company culture.
     
  • Demonstrate Leadership: Leaders, in particular the chief executive, must embody the desired culture, embedding this at all levels and in every aspect of the business. Boards have a responsibility to act where leaders do not deliver.
     
  • Be Open and Accountable: Openness and accountability matter at every level. Good governance means a focus on how this takes place throughout the company and those who act on its behalf. It should be demonstrated in the way the company conducts business and engages with and reports to stakeholders. This involves respecting a wide range of stakeholder interests.
     
  • Embed and Integrate: The values of the company need to inform the behaviours which are expected of all employees and suppliers. Human resources, internal audit, ethics, compliance, and risk functions should be empowered and resourced to embed values and assess culture effectively. Their voice in the boardroom should be strengthened.
     
  • Assess, Measure and Engage: Indicators and measures used should be aligned to desired outcomes and material to the business. The board has a responsibility to understand behaviour throughout the company and to challenge where they find misalignment with values or need better information. Boards should devote sufficient resource to evaluating culture and consider how they report on it.
     
  • Align Values and Incentives: The performance management and reward system should support and encourage behaviours consistent with the company’s purpose, values, strategy and business model. The board is responsible for explaining this alignment clearly to shareholders, employees and other stakeholders.
     
  • Exercise Stewardship: Effective stewardship should include engagement about culture and encourage better reporting. Investors should challenge themselves about the behaviours they are encouraging in companies and to reflect on their own culture.
The FRC intends to reflect on the information gathered and any feedback to the report to inform the Guidance on Board Effectiveness review, and will continue to work with the Coalition partners to encourage debate on culture.
 
Notes to editors:

1.    The FRC is responsible for promoting high quality corporate governance and reporting to foster investment.  We are the UK competent authority for audit and set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work.  We represent UK interests in international standard-setting.  We also monitor and take action to promote the quality of corporate reporting and auditing.  We operate independent enforcement arrangements for accountants and actuaries; and oversee the regulatory activities of the accountancy and actuarial professional bodies.

2.    * The Culture Coalition is a collaborative effort with CIMA (Chartered Institute of Management Accountants), City Values Forum, the IIA (Chartered Institute of Internal Auditors), CIPD (Chartered Institute of Personnel and Development) and IBE (Institute of Business Ethics). The aim has been to gather insight into corporate culture and the role of boards; to understand how boards can shape, embed and assess culture; and to identify and promote good practice.

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